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IMF Survey: IMF to Assist Africa Hit Hard by Global Downturn

Region's current account deficit projected to widen by more than 4 percent of GDP

IMF ready to provide financial and technical help to African countries

Despite weaker financial linkages with the rest of the world than many other regions, Africa is likely to be hard hit by the global economic downturn, putting at risk the progress made across the continent in recent years, the IMF says.

Workers making footwear in Nigeria at a factory funded by Hong Kong investment. (photo: Qiu Jun/Xinhua)

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"While the headlines have been dominated by the impact of the crisis on advanced economies and emerging markets, the crisis also poses a severe challenge for African countries, which the international community must not ignore," said IMF Deputy Managing Director Takatoshi Kato.

He said in a speech at the 12th summit of the African Union in Addis Ababa, Ethiopia on February 3 that because of the world financial crisis and ensuing economic slowdown, world growth would come to a virtual halt in 2009—the lowest rate in 60 years—and only recover next year.

Africa not immune

The global crisis would not spare Africa, which has been going through a period of strong growth, Kato added.

With the expectation of a more pronounced global downturn, weaker commodity prices, and pressure on capital flows, the IMF expects growth in sub-Saharan Africa to slow from about 5¼ percent in 2008 to about 3¼ percent in 2009, about 3 percentage points less than projected just four months ago. With significant uncertainty at the global level, risks to growth remain tilted to the downside.

For 2009, the IMF sees major deteriorations in both the fiscal and external accounts of sub-Saharan Africa. It projects a deterioration in the overall fiscal balance by as much as 6 percentage points to a deficit of about 4 percent of GDP in 2009. The current account deficit for the region is projected to widen by more than 4 percent of GDP, to about 6 ¾ percent in 2009.

Frontier and emerging market countries in Africa are especially affected through their more global financial links, including through bond and equity markets, the IMF said.

"Priority for Africa and for the international community needs to be preservation of the significant achievements in Africa over the past decade," Kato said.

Spreading effects of crisis

There are several channels through which the effects of the crisis will be transmitted to Africa's economies:

• The tightening of global credit has reduced capital inflows and curtailed the availability of trade finance, and could eventually cause donors to reduce their aid to Africa.

• The downturn is affecting the quality of the credit portfolios of financial institutions and could impose losses on other financial assets, such as deposits with troubled foreign correspondent banks, or capital repatriations by troubled parent banks—which are often foreign owned.

• The slowdown in trade is reducing government revenues, thereby worsening the fiscal position in many countries. Fewer resources would mean that African governments would be unable to meet the heightened expectations of their populations for progress in reducing poverty and investing in infrastructure.

Ways of responding

Kato said that the crisis poses unique and varied challenges for African policymakers, particularly because of its complex nature and uncertainty about its duration.

"Because circumstances differ so much across countries, there is no single recipe. But a priority for all countries in the region must be to protect the hard-won improvements in economic fundamentals—more sustainable debt levels, lower inflation, liberalized trade and structural reforms-that enabled the first period of sustained growth in the region in decades," he said.

He suggested a number of key principles to guide economic policy through these difficult times:

• Use the fiscal space in budgeting judiciously. Fiscal responses should be tailored to specific country circumstances. There may be scope for a fiscal stimulus in some countries but, in many other countries, this option may not be available due to already weakened fiscal positions and concerns regarding fiscal sustainability. In some countries, there may even be a need for fiscal consolidation. In all cases, spending plans should be cast in a medium-term context, with targeted measures to protect the most vulnerable.

• Let exchange rates help rebalance growth when possible. In countries where the terms of trade deteriorated, real exchange rates will have to depreciate to preserve macroeconomic stability. Countries with exchange rate flexibility should let the nominal exchange rate depreciate while keeping fiscal and monetary policies sufficiently tight to avoid a devaluation-inflation spiral.

• Closely monitor the balance sheets of financial institutions and be prepared to act promptly if necessary. Governments should identify banking system vulnerabilities and plan how they will react should a banking crisis erupt, recognizing that the resources to support their financial systems may be limited. The liquidity and usability of reserve assets, the status of non-performing loans in the banking sector, and the availability of trade credit deserve particular attention.

• Do not lose sight of medium-term goals. The gloomy environment puts an even higher premium on keeping African economies stable. It is also important to move ahead with planned structural reforms. The current crisis should be seen as an opportunity to foster domestic consensus for urgently needed reforms.

The IMF's Role in helping Africa

Kato stressed that the IMF was ready to do its part to help Africa during the crisis, including by encouraging donors to live up to their financial commitments to the continent. The IMF has urged donor countries to scale up development assistance, as pledged, despite the strains on their own budgets caused by the financial crisis.

The IMF has already increased financial support to low-income countries in the face of last year's food and fuel price crisis. In September 2008, the IMF also modified a financing facility to provide rapid assistance to countries hit by exogenous shocks. Since then, several developing countries have accessed the facility, the most recent example being Ethiopia, which has suffered from rising food and fuel prices.

To assist African countries in strengthening their capacity to meet the current and future challenges, the IMF is also expanding its technical assistance by establishing two new technical assistance centers in Africa.

Tanzania conference

The IMF is intensifying its policy dialogue with African member countries.

One important initiative is a conference that will be co-hosted by President Kikwete of Tanzania and the IMF in Dar es Salaam March 10th and 11th. It will bring together policymakers, the private sector, and civil society from Africa and beyond.

The objective of the conference is to draw lessons from successes in Africa over the past decade and discuss policies that will ensure that the current global economic turmoil does not jeopardize this success. A special session will be dedicated to the Fund's engagement with Africa, during which Finance Ministers will engage with the Managing Director on issues facing the continent and how to strengthen the IMF's support for Africa.